Your Finances: Don't let 2% tax derail contributions

Sunday

Feb 3, 2013 at 2:00 AM

Have you been procrastinating about retirement planning?

Laura Medigovich

Have you been procrastinating about retirement planning?

Well, the doomsday predictions were wrong, and the world did not end on Dec. 21, 2012. So you may as well start thinking about retirement, because the chances are very good that you will someday retire.

The good news is that as of 2013:

You can contribute $17,500 annually to your 401(k), 403(b) or 457 plan. If you are at least 50 years old, you can contribute an additional $5,500 annually. So, if you are 50 or older, you can contribute up to a total of $23,000 annually.

The challenging news is that as of 2013:

Due to the ending of the 2 percent Social Security payroll tax holiday, you will receive 2 percent less in your paycheck (up to the wage base of $113,700). To put this in perspective, if you earn $60,000 a year, you will receive $1,200 less. That is $100 a month less you have to spend.

I have had more than one person tell me that in order to compensate for the 2 percent reduction in their paycheck, they are going to reduce their retirement contributions. When I hear this, I bristle.

I would like to suggest an alternate solution. In today's computer age, your contribution to your employer-sponsored retirement accounts, such as a 401(k), is not static. Most employer-sponsored plans allow you to make changes to your contribution level as often as you would like with just a couple of clicks on the computer.

This means that your retirement contributions are fluid. So, if you think you need to temporarily reduce your 401(k) contributions to cushion your smaller paycheck until you can generate a new budget to accommodate the lower paycheck, then I understand. However, I urge you to ensure that you continue contributing at least enough to receive your company's full match. If you are not sure how much this is, then check with your plan administrator.

Alternatively, if you have a one-time large expenditure, you can reduce your 401(k) contributions for just one or two paychecks. Please keep in mind that, in a perfect world, you would use your emergency savings to pay for large expenditures while maintaining your 401(k) contributions. However, I realize that we don't live in a perfect world. Hopefully, you will feel more comfortable making large contributions into your 401(k) plan if you are aware that you can decrease those contributions later — if and when you deem it necessary.

-- Laura Medigovich is a certified financial planner and vice president for M&T Bank's Hudson Valley region. The views expressed by the author are her own and are not endorsed by M&T Bank, M&T Securities or their affiliates.

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